Market Strategy Radar Screen Weekly April 03, 2017

 Progress Not Perfection

Earnings and the economy are likely to keep investors focused in the near term

The FactSet data also points to earnings growth across eight of the S&P 500’s 11 sectors in the first quarter. For the full year all of the underlying benchmark’s sectors—except for Utilities—are expected to post positive growth.

While political developments in Washington and around the world are likely to garner the most attention across media headlines in the months ahead, we expect investors will focus their attention on earnings results, economic data and signals from Federal Reserve officials as to what pace and with what frequency the process of interest rate normalization will take place.

So far in 2017, the Fed has tweaked its benchmark rate 25 basis points higher at its March FOMC meeting with the market acknowledging the Fed’s action by pushing the 2-year Treasury yield slightly higher.

Conversely the US 10-year Treasury and 30-year Treasury bond yields have eased somewhat lower since the start of the year indicating to us that investors recognize the Fed’s commitment to raise rates at a modest pace as reflation becomes the operative word overcoming earlier concerns about the potential for levels of worrisome inflation over the near term.

From the start of the year the two-year Treasury yield moved from 1.2% to 1.4% (on the day before the FOMC decision) and then eased to 1.26% on the last day of the quarter.

The 10-year Treasury yield started the year at 2.5%, advanced to 2.6% just before the FOMC rate announcement and ended the quarter at 2.4%. The 30-year Treasury began 2017 at 3.1% moved higher to 3.2% on March 13th (two days before the FOMC announcement) and ended the quarter at 3.01%.

Equities worldwide did well in the first quarter

Stateside the S&P 500 (large-caps) and the S&P 400 (mid- caps) respectively advanced 5.5% and 3.6%. The S&P 600 (small-caps) and the Russell 2000 (small-caps) respectively advanced 0.74% and 2.12% as investors rotated out of the higher quality S&P 600 (which had outperformed last year) pushing the small cap Russell 2000 higher indicating to us that investors favored broader exposure in the space as economic expansion appeared to grow at an increasingly sustainable rate.

Internationally, MSCI EAFE (developed markets ex- US and Canada) advanced 6.5% in the first quarter but lagged the advance of the MSCI Emerging Markets and the MSCI Frontier Markets which respectively rose 11.14% and 7.6% in the same period.

Commodity prices mixed; dollar falls

Commodities as tracked by the S&P Russell/Jeffries index of 19 diverse commodities were mixed in the quarter falling overall by 3.4%. Aluminum, Silver and Gold were among the best performers in the quarter while oil and natural gas fell in the same period.

In the currency markets the dollar fell against all ten of the G-10 currencies with the Australian dollar, the Japanese yen and the British pound among the most noteworthy gainers. The Hong Kong dollar, the Canadian loonie and the Norwegian krone lost ground against the greenback in the quarter.

Economics and Earnings Fuel the Bull

Over the course of the first quarter, political wrangling in Washington over the ACA and Immigration policy reminded the markets that political dysfunction is likely to prolong the process of transition for the new administration and challenge its agenda likely even in negotiations pertaining to less controversial items that include corporate and individual tax reform as well as fiscal stimulus via infrastructure spending.

So far the economy and the markets stateside as well as abroad have shown resilience even as they remain prone to rebalancing and rotation. This suggests to us that economics and corporate earnings remain paramount to the continued progress of the bull market.

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